Treasuries fall for 2nd day before $32 billion three-year sale

Treasuries declined before the government sells $32 billion of three-year notes, the first of three auctions of coupon-bearing debt this week totaling $72 billion.

Ten-year yields rose for a second day as the U.S. will sell $24 billion of the securities tomorrow and $16 billion in 30-year bonds on Feb. 14. The Federal Reserve purchased $3.3 billion of securities maturing between February 2020 and November 2022 today as part of its plan to bolster the economy.

“People are kind of sitting there, frozen,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “Everybody thinks rates are bound to go up at some point; it’s not come about yet. People are inclined to stay neutral until they get a better sense of the big direction.”

The benchmark 10-year note yield rose one basis point, or 0.01 percentage point, to 1.98% as of 11:02 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625% note due in November 2022 decline 3/32, or 94 cents per $1,000 face amount, to 96 29/32. The yield climbed to 2.06% on Feb. 4, the highest level since April 12.

Investor Sentiment

Investors in Treasuries raised bets to the highest level since 2011 that the prices of the securities will drop. The proportion of net shorts was at 19 percentage points in the week ending yesterday, the most since July 5, 2011, according to JPMorgan Chase & Co., up from eight percentage points the week ending Feb. 4.

The percent of outright shorts, or bets the securities will fall in value, rose to 30%, the most since June 13, 2011, from 21% the previous week, according to the survey. The percent of outright longs dropped to 11%, from 13% the previous week, the survey said. Investors cut neutral bets to 59% from 66%, the survey reported.

Volatility in Treasuries dropped yesterday to 60 basis points, close to the 59.9 basis points reached on Feb. 7, the lowest level in two weeks, according to Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options.

The measure reached 51 basis points on Dec. 3, the lowest level of price swings since the gauge begin in April 1988. It hit a 2012 high of 95.4 basis points on June 15. Volatility climbed to 264.6 basis points in October 2008 as the financial crisis intensified.